In most loan modifications, the debtor is not actually getting out of paying back any of the principal. Instead, the bank rolls the past-due principal and interest into a larger loan. The bank (or “servicer,” in industry terms) can also roll a bunch of other things like insurance premiums and fees into the new loan balance. Then, sometimes with government money as an incentive, the bank agrees to lower the interest rate and extend the term of the loan to generate a smaller monthly payment. The target amount for that payment, under the main federal program, is 31 percent of the borrower’s gross income. The new loan also has to pass another test for calculating whether the bank is likely to make roughly the same amount of money on the new loan as the old. If it does, and the debt-to-income ratio is right, perhaps the borrower can get a loan modification. If not, then it’s a no-go.
These calculations were made in tremendous numbers during the foreclosure crisis (which was precipitated, in part, by the bad loans that banks targeted to largely black and brown neighborhoods, and for which Wells Fargo was fined $175 million.) Under the most important government-backed loan-modification scheme, HAMP, or the Home Affordable Modification Program, Wells Fargo alone received 1.6 million applications from desperate people.
For these borrowers, the “automated-decisioning tool” that Wells Fargo built took all of the variables from individual loans and borrowers, and combined them with various constants—including, crucially, that incorrect calculation for attorneys’ fees—and came back with a thumbs-up, thumbs-down determination of modification eligibility. But because of that miscalculation, the automated tool gave a thumbs-down to people who were right on the borderline of getting a modification and who should have gotten a thumbs-up.
Only the decision—not its actual calculations—was rolled forward to other parts of the bank, Goyda said, so no one saw the erroneous attorney-fee number. That’s also why, as Wells Fargo disclosed, customers were not actually overcharged; the standalone tool made the decision, but the actual loan terms were dealt with by other means.
Wells Fargo approved 28 percent of modification requests, a little below the average for the four biggest servicers. The number of people affected by the attorney-fee error added up to 0.0386 percent of that HAMP pool.
Set against the massive scale of the Great Recession—9 million jobs lost, 9 million homes lost—this is the kind of small error that could seem insignificant. But this is hundreds of lives irrevocably changed, with all the ripples outward. And there’s still a lot we don’t know, as indicated by the senators’ letter full of questions.
For example, why did it take three years for Wells Fargo to report the problem after it had found the error?